Thursday, 14 April 2022
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•          In the run-up to key events, moves on financial markets usually hold little information. It was no different yesterday ahead of today’s ECB policy meeting. German yields eased 1 or 2 bps. US Treasuries outperformed, seeing yields decline up to -5.7 bps at the front end in a steepening move. Recent dollar strength reversed with the trade-weighted DXY returning below the psychological 100 barrier. It also helped EUR/USD rebound from the 1.082 area to a close of 1.0888. Technical factors may have done their part too. The pair found key support provided by the 2022 low of 1.0806 and the upward sloping trendline connecting the lows of 2017, 2020 and 2022. Whether the euro has more room to run, is completely up to Lagarde and the ECB. The April meeting is without new forecasts but it could be an important one nonetheless. Back in March, the central bank accelerated the APP taper process. Net bond buying was scheduled to end in Q3 but with the optionality of resuming should the outlook worsen. The March Minutes revealed how some governors wanted the summer as a firm end-date, adding that the ECB risks falling behind the curve. Recent inflation data (7.5% y/y) suggest so by making the March inflation forecast already outdated. A much clearer anti-inflation signal from the ECB is needed. Its credibility is at stake: market inflation expectations for the eurozone (10y inflation swap) have risen sharply to about 3% in recent weeks, a series high. Barring the extremely volatile and illiquid 2008 crisis period, the difference with the US has never been lower (near zero). Pressure is also building from peers. Just yesterday, both the Reserve Bank of New Zealand and the Bank of Canada went from raising by a regular 25 bps pace to double that size. The Fed already regrets not having done so in March while again above-consensus CPI in the UK does not allow the Bank of England to dial back the normalization process. Last but not least: the euro. The common currency is suffering from high inflation (expectations) and the lack of clear willingness to fight it. A weak euro spurs price rises even further and thus risks getting trapped in a vicious circle. We believe the hawks at the committee have more than enough arguments to leave their mark on today’s meeting. Chances are APP’s Q3 optionality will be put to bed, but probably verbally (by Lagarde in the press conference) rather than formally (statement). Doing so gives the central bank leeway for a quicker start of the rate hike cycle, potentially in July. Markets would surely adjust accordingly, especially the euro. The first meaningful resistance in EUR/USD is located at 1.1186 but a close above 1.10 is already a nice plus ahead of the long weekend.

News Headlines

•          The Bank of Canada stepped up its tightening pace yesterday by lifting its policy rate by 50 bps, from 0.5% to 1%. Starting April 25, the BoC will also stop its reinvestment policy of maturing Government of Canada bonds, allowing the size of the balance sheet to decline over time. By the end of fiscal 2024, BoC bond holdings will be slimmed down by C$155bn to C$267bn. Canadian inflation (5.7% Y/Y) exceeds the central bank’s forecast and is driven by rising energy and food prices and supply disruptions, in combination with strong global and domestic demand. Inflation is now expected to average almost 6% in the H1 2022 and remain well above the control range throughout this year. It is then expected to return to the 2% target in 2024. The BoC points to an increasing risk that higher inflation expectations become entrenched. Interest rates will need to rise further and governor Macklem signaled preparedness to move more forcefully than +50 bps on rates if needed. The BoC also raised its estimate of a nominal neutral rate to the 2%-3% range, 25 bps higher than in the April 2021 assessment. The loonie performed well after the hawkish BoC meeting with USD/CAD dropping more than 1 big figure, from 1.2670 towards 1.2550.

•          The Bank of Korea raised its policy rate by 25 bps this morning to 1.5% even as governor Lee isn’t replaced yet. The acting chairman concluded that the Board had no choice but to respond to inflation. The Board will appropriately adjust the degree of monetary policy accommodation as the Korean economy is expected to continue its recovery and inflation to run above the target level for a considerable time. The BoK last week warned that inflation is likely remain near and above 4% for the foreseeable future with core inflation forecast to remain around 3%. The Korean won isn’t really impacted by the expected decision with USD/KRW trading around 1224.


European yields (more than) recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown didn’t deter the ECB from stepping up the normalization plans. QE is to end in Q3 with a rate hike already possible in the same quarter. The trend in yields remains north. The German 10-y yield surpassed the 0.80% 2018 top. If confirmed, it would signal that European bond markets are entering a new era.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A 50 bps rate hike May is likely. The US yield curve initially developed a bear flattening trend. However, plans to shrink the balance sheet to be published in May also support yields at longer maturities. The sell-off on core bond is taking a breather post-CPI , but the trend hasn’t changed.

The ECB sticking to – accelerating even – the normalization schedule was a (latent) positive for the common currency. After first protecting EUR/USD’s downside, it next triggered a test of first resistance at 1.1121. A sustained break higher didn’t occur as the dollar remains in the driver’s seat. EUR/USD falling out a closing triangle pattern puts EUR/USD 1.0806 back on the radar.

EUR/GBP took out the first resistances between 0.82 and 0.83. The March ECB and BoE meetings restored some kind of monetary policy balance. The BoE even turned more dovish, but markets question this turn. EUR/GBP is trading off the 0.8203 2022 low, but further gains in the 0.83/0.85 area remain difficult for now.

Calendar & Table

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This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
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